R EASONS

In this chapter some of the problems and shortages of the previous Russian power industry structure are discussed. These issues have probably affected the need of restructuring the power industry, but obviously the reform has also been largely motivated by the political decisions. Some of the reasons for the restructuring were:

• The intense need of investments and constructing of new capacities. It has already been shown that capital investments in the industry is very poor and the constructing of new capacities faced serious problems. In addition, as long as Russia was experiencing a rapid economic growth and had a goal to double its GDP by 2012 the power industry should also meet the electricity demand of the country. Otherwise the growth of GDP would be blocked by impossibilities of

other Russian industries to increase their output. The necessity of constructing new capacities is intensified by the fact that the average lifetime of the existing generating assets of UES remained about 15 years (Russian Electricity Reform 02). In 2002 the World Bank stated that by the year 2007 half of the power plants (with the exception of nuclear power plants) will exceed their useful life (Berney 02, p.62).

• The problem of non-payment for the supplied electricity. As the World Bank reported in the paper “Russia: Bank Assistance for the Energy Sector” in 1995 30% of all electricity bills were unpaid. In 1994 Russian Government allowed to cut off customers who did not pay for the supplied electricity, but this resolution had a lot of exceptions such as military, residential and other customers (Energy Strategy of Russia 04). The decision of disconnection of non-payers has a serious limitation due to the fact that disconnection of some customers may cause some problems and outages to the country’s economy and at the same time become a source of social unrest. In 2000, the paid electricity bills accounted only for 85% (Russian Electricity Reform 02). Non-payments caused serious problems to the industry; most important one being the shortage of working funds for maintenance and non-payments to the fuel suppliers. (Energy Strategy of Russia 04).

• Non-cash payments or inter-enterprise debt. In 1998 the cash payment accounted only for 17% (Chubais 01). Non-payment to the power sector turned to non-payment to other industries which were supplying materials for electricity generation. The fuel sectors were the worst non-payer, but the amount of debt of fuel enterprises to the power industry was less than the amount of debt of the power industry to the fuel industry (Energy Strategy of Russia 04). In 1998 the average cash payment of RAO UES to the coal and fuel industries was 6% less than payment in the opposite direction.

• Lack of transparency. Non-cash payments and inter-enterprise debt led to the lack of transparency of the financial flows. This in its part allowed the avoiding

of taxes and personal interests gain. Shadow annual turnover at the end of the 1990s accounted for almost 8 bln dollars, but at the same time taxes that were paid to the pension fund and federal budget were only 7.5 bln roubles which is 15 times smaller. (Chubais 01).

• Cross-subsidies. It has already been discussed that residential electricity rate is smaller than industrial electricity rate. In the middle of the 1990s the difference was four times (Berney 02). Although since 1998 the growth of residential electricity rate was exceeding the growth of industrial electricity rate, in 2000 the ratio of corresponding rates was 0.5 which is not quite a normal ratio which usually is about 1.6 (Chubais 01, Russian Electricity Reform 02).

Cross-subsidizing also exists among the FOREM suppliers. Prices for hydro and nuclear electricity delivered from FOREM were 80% and 20% smaller than the prices for thermal electricity (Russian Electricity Reform 02); taking this fact into account and analysing the figure 2.12 (page 28) (which clearly shows that hydro electricity is highly underestimated while thermal is highly overestimated) it is easy to conclude that the thermal power plants are less competitive compared to nuclear and hydro power plants. This was compensated by cross-subsidizing thermal power plants.

• Low economic efficiency of industry enterprises. In addition to the fact that in 1999 almost 40 AO-Energos were economically inefficient (see Section 2.5.3.3 ) in 1998 the number of AO-Energos and federal level power plants on the verge of bankruptcy was 21 (Chubais 01).

• Cost-based pricing. By analyzing the graph below it is easy no conclude that there were no stimuli to decrease expenses: tariff rate of growth correspond to the cost price rate of growth.

Figure 3.1 Dynamic tariffs and cost price of electricity production (Urinson 03)

• RAO UES also reported that one of the reasons for the reform was that “access to the market was closed for new independent market players” (RAO UES a). In other words there were a non-competitive market structure.

• The fact that RECs’ tariff regulation is determined by local authorities plays an important role in favour of the necessity of the reform. In 1999 half of the RECs had improved tariffs under the FEC recommended level (Russian Electricity Reform 02). This means that local authorities were acting in the interests of big local businesses and were possibly corrupted by them.

• Operating inefficiencies. The World Bank reported that “in the first half of the 1990s employment increased by 40% while output declined by about 40%”. This of course led to the increase of expenses and decrease of financial support for maintenance and refurbishment. (Berney 02)

• Non-economical dispatch. This problem was noted by The Word Bank which argued that the dispatch control of the national grid was not effective. “Although Russia had millions of miles of transmission lines to distribute power over its wide network of power plants, it did not have an effective national dispatch

system. Inefficient dispatch (that is, the operation of generation plants with high variable costs instead of those with low variable costs) is estimated by the Russian Institute of Energy Research to have cost over US$1 billion per year by the mid 1990s.” (Berney 02, p.62)